Although settling a debt clears away the burden of overdue unpaid bills, it can be bad for your credit score. While it brings your account’s balance back to zero, your credit report will show it was settled for less than the total amount owed or agreed upon, which would prompt a negative mark.
That said, settling debt is much better than not paying at all; it’s more beneficial than letting the account go delinquent or, worse, default.
After settling a debt, what’s important is what you do to get your credit score back up. There’s no one best way to rebuild credit; it requires consistent responsibility to pull off. However, getting help from the best credit repair companies, such as The Phenix Group, can make the process faster, simpler, and more convenient.
A debt settlement is an agreement between you and your credit card issuer, lender, or debt collector to reduce (or completely wipe off) your balance in exchange for a lump-sum payment lower than the original total debt.
Imagine you owe a credit card company $30,000. Due to financial difficulties, you struggle to pay your minimum amount due, pay your bills late, or even miss payments completely. With a debt settlement, you could work with the credit card issuer to pay less, say $20,000, with the provision that they will forgive the rest of the debt and mark your account as paid.
A debt settlement rids you of heavy unpaid sums, and while it seems like a win, it has its trade-offs–settling a debt means you were unable to keep your end of the bargain as originally agreed on, which is a red flag for future lenders. Here are some ways that a debt settlement can affect your credit:
A settled debt will be marked on your credit report as “paid-settled.” While this is better than a charge-off (a balance the creditor has given up on collecting), it’s still a strike that’s not good to have. Depending on your credit report, financial history, and consumer profile, your credit score can lose anywhere from thirty to 150 points.
The record of a debt settlement stays on your credit record for at least seven years—and that’s if you have no history of late payments. If you do, the seven-year countdown starts from the date when your account first became delinquent.
Fortunately, the severity of this on your record will go down over time because lenders first look at your most recent financial history. Still, your credit score will suffer as long as it’s there, making it difficult to get loans or new lines of credit.
The way a debt settlement can affect your credit utilization goes two ways. For one, a settled debt can mean less weighing down your credit utilization, which can positively affect your credit rating. On the other hand, if a debt settlement comes with a closed account, your credit utilization goes up, as the space available for some of your expenses is wiped away.
Fortunately, there are ways to repair your credit after it takes a toll from a debt settlement. Here are some tips to bring that score back up:
Your payment history is the number one factor that affects your credit score. After settling a debt, you should not make the same mistakes that’ll end up in another unpayable amount. Moving forward, pay your bills on time–every time.
Mind your utilization rate, making sure you don't exceed 30% of your limit (which is the threshold recommended by most experts). Remember: the smaller the credit utilization, the better it is for your credit score.
A credit repair company is an organization dedicated to helping consumers improve their credit scores. But, how do credit repairs work? For starters, these financial experts review your credit report to find any errors. They gather evidence to challenge these disputes and then negotiate on your behalf with lenders and credit bureaus. Credit repair companies can also guide you on healthy financial habits.
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